2016 (2) TMI 31 - AT - Income Tax

Addition on account of disallowance of provision for write off of spares - CIT(A) deleted the addition - Held that - Physical inspection is conduced both departmentally as also by external agencies. During the year under consideration M/s. Bandyopadhyay & Associates, Cost Accountants, carried out the valuation of spares at Nagaon and Cachar Paper Mills and identified items of obsolete and damaged stores and spares and furnished report on valuation of stores and spares. Based on the valuation report that assessee written off ₹ 656.36 lacs in its profit and loss account for the year ended 31.03.2007. However, in respect of the very same items assessee had created provision in the earlier years to the extent of ₹ 646.36 lacs and therefore adjusting such provisions, the net additional sum of ₹ 10 lacs only was debited in the profit and loss account. We futher find that similar write off were also made by the assessee in the financial year 2003-04 and 2005-06. The disallowance made by the AO in AY 2004-05, was deleted by the CIT(A) and thereafter COD refused permission to file appeal against the said appellate order. In AY 2006-07 also the assessee had written off ₹ 184. 07 lacs. In the regular assessment u/s. 143(3) for A. Y. 2006-07 the same AO after due consideration of the explanation and the CIT(A) s order for AY 2004-05, had refrained from making any disallowance. In view of the facts and circumstances of the present case, We are of the view that the claim of assessee, writing off in its Profit & Loss Account, the value of obsolete stores and spares, is a genuine claim and CIT(A) has rightly allowed the same. - Decided in favour of assessee. Disallowance 14A read with Rule 8D - Held that - We are of the view that the AO was unjustified in making the disallowance of ₹ 98.23 lacs merely by adopting an arithmetical formula prescribed in Rule 8D(2)(iii) of the Rules. We are of the view that disallowance u/s 14A of the Act can be made only if the facts of the case prove that at least some expenditure was actually incurred by the assessee for earning exempt income. If, however, the facts on record and the assessee s accounts for the relevant year establish that in fact no expenditure was incurred in relation to earning tax free income then no disallowance is permissible under the substantive provisions of Sec 14A of the Act. We, therefore are of the view that CIT(A) has rightly deleted the disallowance of ₹ 98.23 lacs, arbitrary made by the AO without bring on record any material which even suggested that same expenditure was in fact incurred by the assessee for earning dividend from its wholly owned subsidiary Accordingly, we confirm the order of CIT(A) and this issue of revenue s appeal is dismissed.- Decided in favour of assessee. Addition of prior period adjustment - Held that - The assessee being a government undertaking whose plants are situated in Assam and registered office at Calcutta besides administrative office at Delhi and its several office and depots in different part of the country. The accounting procedure prescribed by C&AG has institutionalized system of checks and balances and accordingly certain expenses required clearances from different authorities located at different locations and cities. This type of major expenditure debited under the head CENVAT credit wrongly claimed in earlier years, in which excess CENVAT credit was claimed on production of paper. During the year under consideration, on inspection of excise record by Central Excise Officials, certain procedural irregularities were detected while claiming CENVAT credit. On detection of irregularities the assessee was directed to pay basic excise duty of ₹ 1,31,10,849/-, education cess of ₹ 83,298/- and statutory interest of ₹ 66,08,110/-. The assessee provided liability of CENVAT of ₹ 198.09 cr. for the year ended 31.03.2007. This statutory liability was discharged during FY 2006-07 relevant to this AY 2007-08 and according to us, the same was allowable u/s. 43B of the Act. Accordingly, we are of the view that this liability is allowable liability and we direct accordingly.- Decided in favour of assessee. Disallowance of claim of write off of loose tools - Held that - The method adopted by the assessee and accepted by the department in all the past assessment years by the same AO. In the immediately three preceding years, while completing regular assessment the AO had allowed the regular deduction for the write off of loose tools on amortization basis. In view of the above, we are of the view that the CIT(A) has erred in not allowing the deduction. We reverse the order of CIT(A) and allow the claim of deduction of write off of loose tools. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of provision for write-off of spares.
2. Disallowance under Section 14A read with Rule 8D.
3. Rebate under Section 88E while computing book profit under Section 115JB.
4. Addition of prior period adjustments.
5. Disallowance of write-off of loose tools.

Issue-wise Detailed Analysis:

1. Disallowance of provision for write-off of spares:
The first issue pertains to the deletion of disallowance made by the Assessing Officer (AO) of provisions for the write-off of spares amounting to Rs. 10 lacs. The AO disallowed this provision as it was not considered an allowable expenditure. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim based on the precedent set in the assessee's own case for the Assessment Year (AY) 2004-05 and the fact that no addition was made on the same issue for AY 2006-07. The Tribunal upheld the CIT(A)'s decision, noting that the write-off was based on a valuation report by M/s. Bandyopadhyay & Associates, which identified obsolete and damaged stores and spares.

2. Disallowance under Section 14A read with Rule 8D:
The second issue concerns the deletion of disallowance made by the AO under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962. The AO disallowed Rs. 98.23 lacs as expenditure linked to earning exempt income. The CIT(A) deleted the disallowance, noting that the dividend was received from a wholly-owned subsidiary and no new investment had been made after 1983. The Tribunal confirmed the CIT(A)'s order, stating that the AO made the disallowance arbitrarily without considering the assessee's accounts, which showed no actual expenditure incurred for earning the exempt income.

3. Rebate under Section 88E while computing book profit under Section 115JB:
The third issue raised by the revenue was regarding the CIT(A) directing the AO to allow rebate under Section 88E while computing book profit under Section 115JB. The Tribunal dismissed this ground as it was not arising out of the order of the CIT(A).

4. Addition of prior period adjustments:
The fourth issue in the assessee's cross-objection pertains to the addition of prior period adjustments amounting to Rs. 172.05 lacs. The AO added back these expenses, stating that they were not allowable under the mercantile system of accounting. The CIT(A) allowed some items after verification but disallowed others. The Tribunal found that the liability for CENVAT credit, basic excise duty, education cess, and statutory interest crystallized during the year under consideration and was allowable under Section 43B of the Act. Therefore, the Tribunal directed the AO to allow these expenses.

5. Disallowance of write-off of loose tools:
The fifth issue concerns the disallowance of the write-off of loose tools amounting to Rs. 23.63 lacs. The AO disallowed the claim, and the CIT(A) confirmed this disallowance. The Tribunal noted that the assessee had consistently followed the practice of writing off loose tools in five equal annual installments, which had been accepted by the department in past assessments. Therefore, the Tribunal reversed the CIT(A)'s order and allowed the deduction for the write-off of loose tools.

Conclusion:
In conclusion, the Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection, providing detailed justifications for each issue based on the facts and circumstances of the case. The Tribunal upheld the CIT(A)'s decisions where applicable and provided relief to the assessee where warranted.